Income and Substitution Effect
Suppose a person has to purchase two items on a regular
basis, Parker pens and shirts. Currently, he buys 5 pens and
4 shirts. Now, there is a sudden fall in the price of pens and
now he buys 12 pens and 3 shirts on a higher indifference
curve. However, before this final shift in combination,
there was also an interim shift to a new combination on the
same indifference curve where he bought 8 pens and 2
shirts. This interim shift can be attributed to which effect?
Income effect
Price effect
Substitution effect